‘Speculative Vacancies’ – The Empty Properties Ignored By Statistics

SpecVac_poster-2

By Catherine Cashmore

There have been four housing affordability inquiries since the early 2000s.

The “First Home Ownership” inquiry by the Productivity Commission (2004). The Senate Select Committee inquiry into housing affordability (2008). The inquiry into affordable housing by the Senate Economics References Committee (2014), and the current Inquiry into home ownership by the Standing Committee on Economics (2015).

The central recommendation of each inquiry has been to increase the supply of affordable housing.

However, missing from the analysis is any mention of the number of long-term vacant dwellings held for speculative gain across Australia’s major capital cities – not for sale, and not for rent.

Because they are not publicly advertised, these properties are overlooked by current short-term vacancy statistics based on reporting by real estate firms.

Prosper Australia’s annual Speculative Vacancies report uncovers these latent holdings. Using water data as a proxy, we provide a unique insight into the number and ratio of long-term vacancies withheld from the market for a full 12-month period in Melbourne.

Stratified by postcode, the report provides a detailed study to enlighten government on sound policy recommendations to drive prosperity and assist housing affordability.

We cannot have a serious conversation about Australia’s housing supply ‘crisis’ without addressing the fundamental drivers that permit – no-less encourage – owners to lay a significant proportion of prime urban land to waste.

There are many diverse motivating factors prompting owners to leave buildings idle. Some may be undergoing renovation or awaiting demolition. Others may be derelict and in need of substantial and costly repairs.

However, the notable trend underlying the data is the large divergence between residential real estate prices and rental incomes – including both actual and imputed rents on owner-occupation.

During the 2014/2015 financial year alone, Melbourne’s median capital city land price accelerated over 14 per cent.

At just over $700,000, Melbourne’s median house price is 8.8 times median income. Yet, at just 3 per cent, gross rental yields in Melbourne are at their lowest on record.

Real net rental incomes across Australia have been declining since 2001. Between 1994 and 2013, the number of negatively geared investors dependent on rising prices to profit escalated 152 per cent. In contrast, positively geared investors have increased by a much lesser 47 per cent.

The overwhelming majority of negatively geared investors (95 per cent) chase the capital gains associated with existing stock, rather than investing into new residential construction. Australia’s housing stock has been turned into little more than a vehicle for financial speculation, placing increasing pressure on prices.

To evidence further, since 1997, the share of loans for housing has increased from 47 per cent to 66 per cent. Only approximately 10 per cent of the flow of housing finance has been for the construction of new dwellings. Meanwhile, the ratio of business credit to total credit has been declining since the late 1980s.

Credit extended for enterprise is proven to be positively associated with economic growth and faster reductions in income inequality. Household credit (principally mortgage debt) provides no such benefit. Rather, it leads to a misallocation of credit, to feed an elevated level of speculative rent-seeking demand.

It is important to note that increasing land values are not borne from any productive activity undertaken by the owner who (as the classical economist John Stewart Mill termed it) “grows rich in their sleep without working, risking or economising.”

Rather, the value of land reflects its surrounds, growing primarily through increased demand generated by government-funded infrastructure.

Rising land-values yield a special type of unearned income known as “economic rent.”

As a broad measure, land prices can be calculated by multiplying current rents by 20 years. This is known as the capitalisation rate.

It is speculation induced by the capitalisation of the rental value of land into a tradable commodity that drives the boom-bust volatility of the real estate cycle.

Withholding prime locations from the market in an unused state generates artificial scarcity, raising prices and accelerating mortgage debt.

It underpins our cultural obsession of betting on bourgeoning land-price gains and using leverage to climb the mythological property ladder.

The consequential subversion to policy reform is inevitable, as the benefits of government-funded infrastructure flow disproportionately to landowners in the form of unearned windfall gains.

Large divergences between rental income and land price inflation are an unhealthy challenge to both housing affordability and economic stability.

They lead to ‘speculative vacancies.’

These are properties that are denied to thousands of tenants and potential owner-occupiers by landowners that have no motivation to generate any rental income. The result is a lowering of publicised vacancy rates, and increased land prices.

The regulatory environment provides a prime motivator for property speculation.

Landowners betting on a continuation of past high rates of appreciation are advantaged by preferential tax exemptions worth an estimated $36 billion a year.

Negative gearing coupled with the 50 per cent capital gains tax (CGT) discount for property held in excess of 12 months, have ensured high-income individuals are the main beneficiaries of rising land values. The top 40 per cent of income earners hold nearly 80 per cent of all investor mortgage debt.

First home buyer grants and other state incentives such as stamp duty waivers, owner-occupier exemptions from CGT and state land tax (SLT), changes to the superannuation laws enabling leverage into real estate (2007) – typify the commodification of property as a tool for profit seeking gain, advantaging existing owners vis-à-vis the young and the poor.

These incentives strip away any hope of a market aspiring to house people, rather than encouraging speculative greed. Policies that foster land price inflation and reward rent-seeking behaviour cannot deliver positive economic outcomes.

The IMF finds more than two-thirds of the world’s recent 50 systemic banking crises were caused by patterns of accelerating real estate prices relative to GDP.

A comprehensive analysis of historical data demonstrates a clear pattern of repeating real estate and construction cycles topping-out some 24-48 months prior to the world’s major economic downturns.

This cyclical top has been a precursor to all of Australia’s economic recessions.

Yet, it is not the recession that damages the economy. The damage arises from mounting levels of leveraged debt extended for the purpose of land speculation.

In a little over two decades, the share of investment property loans as a proportion of total debt has tripled from one-tenth to three-tenths.

Investors now account for 40 per cent of total housing loans outstanding.19 Australia is the third most indebted household sector relative to GDP in the OECD.

At just over $2 trillion,21 the unconsolidated household debt to GDP ratio sits at an eye-watering 121.5 per cent.

The burden of diverting an ever-increasing proportion of incomes to debt-servicing by both business and buyers has progressively undermined the health and competitiveness of the Australian economy.

The long-term risks to our financial system are precarious. The economic impacts for low- to middle-income Australian’s are disastrous.

Ownership for 15-34 year olds has been in a downward trend since the mid 1970s. For 35-44 year olds, since the mid 1980s.

Even those able to step onto the fabled property ladder, long-term security of tenure is not guaranteed. Significant numbers are ‘churning’ on the edges of owner occupation.

Between 2001 and 2010, one in five homeowners (22 per cent) dropped out of home ownership – for 9 per cent, this move was enduring.

For those that do purchase, there is a spike in the chances of a termination back into rental housing after just one year.

Importantly, the trend is accompanied with episodes of poor health, unemployment and financial stress.

After exiting homeownership, 34 per cent of Australian ex-home owners require access to housing assistance. Additionally, one in 10 Australians has been homeless at least once in their lives.

The incidence of housing stress for owner-occupiers declines with age, however, for long-term tenants and those under 35 years, it remains stubbornly high.

Current policy cements this demographic at the bottom of the pile.

Ineffective use of residential and commercial sites further stimulates the volatility and inequity of the real estate cycle. Land’s locational supply cannot be increased to accommodate rising demand. Buildings banked and withheld from use exacerbate this disparity.

As such, the SV rate can be likened to the unemployment rate for land.

It results in the productive capacity of the economy being ruthlessly compromised as citizens and businesses are forced to pay higher prices and commute greater distances for employment and lifestyle needs.

Prosper Australia’s Speculative Vacancies report gives a unique insight into the impact of current housing policy.

The report identifies 82,724 residential dwellings and 30,085 commercial properties in Greater Melbourne likely vacant for a period of 12-months or more.

As government and real estate industry vacancy statistics are neither impartial nor comprehensive, this report adds a valuable dimension to understanding the divergence between real estate industry short term vacancy rates (the percentage of properties available for rent as a proportion of the total rental stock) and the number of potentially vacant properties exacerbating Australia’s housing crisis.

We advocate these figures should correlated along side our Speculative Vacancy findings to produce the widest and clearest measure of vacant housing supply to guide policy makers.

Read the report

… extract from Executive Summary:

....If just those residential properties consuming 0LpD were placed onto the market for rent, this would increase Melbourne’s actual vacancy rate to 8.3 per cent. If 82,724 properties using under 50LpD were advertised for rent, the vacancy rate could rise to an alarming 18.9%. (1)

Further examination of 130,610 non-residential properties across 254 postcodes over the same period identifies 7,941 or 6.1 per cent of Melbourne’s commercial stock was also vacant over 2014, i.e. having consumed 0LpD.

Government failure to address Australia’s housing affordability crisis is indefensible. Access to affordable shelter is a basic human right and underlies national prosperity.

Vacant properties impose a needless economic burden. Residents and businesses are forced to leapfrog vacancies to lesser sites at great cost, increasing commuting times and placing upward pressure on prices.

Latent supply is usually not visible without a significant downturn in economic activity. If withheld stock were put to use, it would reduce cost-of-living pressures for tens of thousands of low and middle-income families and businesses marginalised by the cost of land.

This report recommends fundamental reforms to reduce the propensity for volatile boom-bust land cycles fuelled by speculation and unsustainable levels of household debt.

Current property taxes discourage investment into new housing, inflate the cost of land, stagnate housing turnover and hinder putting property to its highest and best use.

The report advocates that profound inefficiencies could be significantly alleviated if current transaction taxes were phased out and replaced with a holding tax levied on the unimproved value of land, alongside enhanced infrastructure financing methods for new developments.

Policy makers have thus far ignored Melbourne’s speculative vacancies and their effect on property prices.

With some 4.8 per cent of Melbourne’s houses showing severe under-utilisation, there is no housing supply crisis. Rather, rising prices indicate significant distortions created by policies supporting rent-seeking behaviour.

Government and statistical bodies need to recognise this disparity and employ a more comprehensive data analysis of vacant housing stock.

Read the report

Footnotes:

[1] Residential per capita consumption in Melbourne is currently 183 LpD.

http://www.afr.com/real-estate/leaky-data-water-use-shines-a-light-on-occupancy-20151207-glhewz

http://www.bloomberg.com/news/articles/2015-12-08/nobody-s-home-australian-boom-leaves-swathe-of-empty-properties

http://www.news.com.au/finance/real-estate/shocking-number-of-melbourne-properties-left-vacant-despite-huge-housing-demand/news-story/4dc12b7033d1e43e91458b673fdabf79

http://www.domain.com.au/news/nearly-20-per-cent-of-melbournes-investorowned-homes-empty-20151209-glixgs/

http://www.businessspectator.com.au/news/2015/12/9/property/vacant-properties-soar-victoria

http://www.macrobusiness.com.au/2015/12/the-melbourne-ghost-city-revealed-2/

Also covered by “Friendly Jordies

https://www.youtube.com/watch?v=clC_vIlbtME

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Australia’s Empty Houses…

By – Catherine Cashmore

“The home, built in 1857, had been unoccupied for years” said the report of a dilapidated Victorian-era mansion in Sydney’s Balmain East.

Balmain East

Situated in an exclusive residential pocket next door to Balmain East ferry wharf and sporting bayside views of Sydney’s Harbour Bridge, the 457 square metre block of land attracted 200 people to the auction, 18 registrations to bid, and sold $830,000 above the reserve to a local home buyer for $2.68 million.

According to Property Observer, the site had been acquired in 1973 for $33,500 by the notable gay right’s activist and historian, Alexander ‘Lex’ Watson – president of The Pride History Group, and lecturer in Australian Politics at Sydney University, who sadly passed away earlier this year after a long battle with Cancer.

$33,500 in 1973 dollars would be $289,724 in real terms today – making the selling price of $2.68 million, a value almost ten times as great.

The location was the key of course, with planned upgrades to Balmain East ferry wharf, which will now receive services from the Parramatta River along with extra ferries to McMahons and Milsons Point, further enhancing its value.

Had the home been only a few kilometres away, a few hundred thousand could have been wiped off the price tag and the media sensation may not have been so great, even so, it is not the only dilapidated property to make the press of late.

Opportunistic buyers caught up in Sydney and Melbourne’s property boom, have snapped up a string of empty homes, selling under stiff competition while exceeding all expectations of price.

An empty hat factory on Wilson Street, Newtown, also vacant for years, sold earlier this month for $1.725 million.

A dilapidated home on 360 square metres of land in Thornley St, Leichhardt, vacant for more than 30 years, sold a few weeks ago for $1.4 million at auction.

A home in total disrepair at 19 Durham St, Stanmore, situated on 172 square metres of land, vacant for years and sold for $923,000.

And not to leave Melbourne out, an unliveable Richmond property on 726 square metres of land, also vacant for years, sold for $2.544 million – $900,000 above the price it achieved only two years ago.

Screen Shot 2014-09-30 at 2.50.03 pm The list goes on…..

Barring the last example that came with plans and permits for two town houses, these properties transacted for nothing more than their land value.  However, while the buyers purchased a location, they did not pay for the services that rendered that location valuable or, in the case of the first example, compensate the local residents for suppressing access to some of the best views in town.

Instead, reinforced by inelastic zoning constraints, generous tax treatment, and unrestrained speculative growth in dwelling finance commitments, they unwittingly rewarded the sellers with a substantial unearned gain for withholding valuable land from use and depleting the nation’s housing supply.

This means of ‘creating wealth’ common in most western nations, sits at the root of many of our economic and social problems today. It has both a debilitating and destabilising effect on the economy, evidenced clearly in a painful and rising trend of  income and housing inequality that burdens the capacity of the ‘welfare state’ to compensate.

Interestingly, Lex Watson, the prior owner of the Balmain East property cited above, was purportedly greatly influenced by the writings of John Stewart Mill whose work was said to be: “the touchstone of his life and later activism.”

Born in London in 1806, John Stewart Mill is remembered as: “the most influential English-speaking philosopher of the nineteenth century.”

Inspired by his father James Mill, who tutored his nine children with daily lessons in Latin, Greek, French, history, philosophy, and politics, John Stewart Mill was a leading economist – a prolific logician, who dedicated his life to championing the causes of liberty and equality, while advocating ‘radical’ ideas, such as the abolishment of slavery and equal rights for women.

In 1848 he published the most prominent textbook on economics in the 19th century: Principles of Political Economy – critiquing systems such as communism and socialism and cementing Mill’s reputation as a leading public intellectual.

Extending on the ideas set out by Adam Smith and David Ricardo, Mill employed concepts that that have been written out of today’s economic narrative, that conflate land and capital – virtual opposites – while failing to distinguish between income that is ‘earned’ and the economic surplus that disproportionately flows to those that “love to reap where they never sowed.” A process best set out in Mason Gaffney’s book, “The Corruption of Economics.”

Writing on the moralities of taxation in Book V, Chapter II of ‘Principles of a Political Economy’ Mill commented:

The ordinary progress of a society, which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing.”

From this Mill concluded that the government should collect society’s economic rents in lieu of taxes that impede productive labour and industry, including taxes on the improvement and the transfer of property, (stamp duty) which he said, should rather be: “distributed over the land generally, in the form of a land-tax.”

He was not the first or last to do so.

He followed a long line of influential activists, from Thomas Paine, who in his 1797 publication Agrarian Justice stressed:

“Men did not make the earth…. It is the value of the improvement only, and not the earth itself, that is individual property…. Every proprietor owes to the community a ground rent for the land, which he holds.

To most recently, Dr Ken Henry, who chaired Australia’s ‘Future Tax System Review’ and noted: “… economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”

The classical economists recognised that unless profits from the ‘enclosure of the commons’ – land, water rights, minerals, and so forth – were effectively collected and shared for the benefit of the community, all productive gains, every improvement in society and the economy, would be capitalised into rising locational land values, enriching those that owned the assets but more so, those who created the credit and traded on the debt.

This is equally applicable to reductions in the cost of construction.

For example, news that high-density apartment towers close to public transport in Sydney, will no longer require parking facilities, delivering an estimated saving of $50,000 – $70,000 in development costs, will do little to ease affordability.  Rather it will simply leave more funds available to bid up the price of land and this is precisely what we are seeing in Australia – sky rocketing land prices requiring ‘super tall’ structures to provide a viable return on investment.

While the small one and two bedroom units may be spruiked as affordable, when calculated by cost or rental value per square metre of floor space, they are remarkably expensive.

Mason Gaffney expanded on the theory, coining the acronym ATCOR – “All Taxes Come Out of Rent.” Showing that whether renting or buying, total tax liabilities from whatever area carried by the consumer, deduct from the cost of a site to the extent they limit the amount a buyer is both prepared and able to pay.

It follows that the removal of all taxes would naturally wash up into higher prices for real estate, which in theory leaves the resulting rise in the economic rent of land ‘just’ enough to replace the forgone revenue. (For more, see Fitzgerald (2013) “Resource Rents Of Australia”)

When that liability falls on productive industry, deadweight losses occur. For example, 90% of our taxes are distortionary, adding 23% to prices of goods and services.

However, when the burden falls on land and monopoly rents – minerals, fuels, the broadcasting and communications spectrum, patents etc. The reverse is the case.

In respect of land, a higher tax rate levied on the unimproved value would discourage leaving dilapidated homes vacant for years while we struggle with an assumed housing shortage – suppressing the speculative element that adds to the volatility of the market cycle.

Furthermore, when the gain is collected and used to fund the expansion of infrastructure in order to service a growing population, the tax base is expanded without a subsequent lift in rates.

In the 19th century, nature’s ‘free lunch’ was largely limited to the aristocracy of the great landed estates, today monopoly profits are absorbed by the financial sector which wields significant political leverage from lending ‘endogenously’ created credit against real estate collateral, with the compounding interest disproportionately increasing levels of household debt. As I pointed out previously – Australia will increasingly feel the effect of this as we move into 2019.

Our current tax system is crooked. It allows large companies to jump through loop holes in legislation and ‘cook the books,’ shipping profits offshore, leading to an estimated $1.6 billion in tax revenue forgone, while land on the other hand, is used by investors as an effective tax haven.

In a recent post by Dr Gavin R. Putland of the Land Values Research Group, he notes:

“No matter how high your gross income may be, you can make your taxable income as low as you like, simply by buying enough negatively-geared properties. Such artificially reduced taxable incomes are used in ATO statistics on negative gearing, which are then trotted out by the property lobby as “proof” that most negative gearers aren’t rich — as exposed, for example, in Michael Janda’s article “The myth of ‘mum and dad’ property investors” (The Drum, 24 September 2014).”

Enlightening the disparity of our tax laws further, Putland includes a citation to a series of exchanges posted in the comments section of Michael Janda’s article in The Drum:

“AE:

… Deductions for expenses incurred are a fundamental of our and every other economy. Show me one society where you cannot deduct expenses incurred.

Gavin R. Putland:

How about *our* society? The cost of commuting to work is manifestly a cost incurred for the purpose of earning your wage or salary, but you can’t deduct it against your wage or salary (or anything else) for tax purposes. QED.

Mitor the Bold:

That’s an ATO commandment, but theoretically you should be able to.

Overit:

Actually, Mitor, it predates the ATO by about 200 years, and is derived from a pre-industrial-revolution House of Lords ruling which said that if tradespeople choose not to live in or over their business premises, then they should not be able to deduct the cost of travelling to their work.

However, I agree that theoretically you should be able to. Which is why the novated vehicle lease business has grown so rapidly, because that effectively enables people to deduct the cost of travelling to their chosen place of work. Bad luck for all of us who travel by public transport.

JoeBloggs:

The cost of travelling from your home to work is not a work related cost. It is the cost relating to your choice where you live, a personal aspect of your life. No worker, contractor or business can claim as a deduction ‘personal’ costs. QED.”

As Putland points out:

“So there you have it, proles: The industrial revolution never happened. You always have the option of living at your place of work. If your place of residence is somewhere else, that is a “personal” choice on your part, and the cost of travel between the two is a ”personal” expense, not a work-related expense. If you want a big deduction against the wages of your labour, you’ll have to gear up and speculate on assets.”

Australia’s economic narrative is more concerned with suppressing wages than high land values.

Joe Hockey has unashamedly stated that any rise to the minimum wage “will cost jobs” and “reduce competition,” while remaining notably silent on the average CEO pay, which sits at an estimated 63 times average earnings (as at 2013,) as well as showing scant regard for rising land values which increase the associated costs of running a business, while discouraging growth in productive industry.

It uncovers a damaging Neo-Liberal agenda, which will do nothing to raise the living standards of Australians struggling to make ends meet.

Meanwhile in Germany, the house price-to-income ratio has fallen by almost a third nationally since the early 1990s, yet residents enjoy low unemployment and some of the highest wages per capita in the world – including the highest minimum wage in the world. Germany weathered the 2008 depression better than any other country in Europe by maintaining its focus on value adding growth.

(The Economist – German house price to average income.)

Screen Shot 2014-09-30 at 5.37.01 pm

130508_-_Wages_and_salaries_growth_rates_in_Germany__total_economy

The public needs to recapture the debate and push for a better set of democratic tools, that let the people decide directly on the benefits that can aid their communities, rather than the current state of affairs which is coloured with vested interest, polarising voters with false promises and flawed economic thinking.

The rise of citizen’s juries, where a diverse and representative group of people are randomly selected and given the information and training needed to deliberate together on matters of policy – for the benefit of all, not just a few –  limiting the power of corrupt government officials, may take us one step closer to achieving this.

Top of the agenda should be every citizen’s right to affordable access to land and shelter.

Skyscraper Hubris – Pride Before A Fall

By – Catherine Cashmore

“Bill, how high can you make it so that it won’t fall down?” reportedly asked financier John J. Raskob, as he pulled out a thick pencil from his drawer, and held it up to William F. Lamb, the architect he had employed to design and construct The Empire State Building.

It was the ‘race to the sky’ and it marked the peak of the roaring Twenties. Capturing what is perhaps one of the most exciting periods in New York’s history.

“Never before have such fortunes been made overnight by so many people,” said American journalist and Statesman Edwin LeFevre (1871–1943)

While areas of the economy such as agriculture and farming, were still struggling to gain ground from the post WWI depression, and a large proportion of the population continued to live in relative poverty. Advances in technology, rapid urbanisation and mass advertising accelerating consumer demand, produced an era of such sustained economic prosperity, it led Irving Fischer one of America’s ‘greatest mathematical economists’ to famously conclude that:

“Stock prices have reached what looks like a permanently high plateau.”

“Only the hardiest spoilsports rose to protest that the wild and unchecked speculative fever might be bad for the country.” Wrote historian Paul Sann, in his publication, ‘The Lawless decade.’

“The money lay in stacks in Wall Street, waiting to be picked up. You had to be an awful deadhead not to go get some.”

Land values of course captured the gains, and between 1921 and 1929 lending on real estate increased by 179%, and urban prices more than doubled.

According to research collated by Professor Tom Nicholas and Anna Scherbina at the Harvard Business School in Boston, by 1930 values in Manhattan, including the total value of building plans, contained “only slightly less than 10% of the total for 310 United States cities (Manhattan included) during the same period.”

A staggering figure considering Manhattan at the time, contained only 1.5% of the US population.

Few raised concerns however.

It was believed the Federal Reserve Act, created in 1913 “to furnish an elastic currency” would tame the business cycle and – as the First Chairman of the Federal Reserve Charles S Hamlin put it:

“..relegate to its proper place, the museum of antiquities – the panic generated by distrust in our banking system..”

The National bank runs of the past had been exacerbated because there was ‘no stretch’ in times of crisis, or moderation in the rates of interest.

However, the bulk of lending against real estate over this period was not limited to New York, or to institutions that were members of the Federal Reserve.

Thousands of new banks were setting themselves up in outlying areas and as noted by Elmus Wicker, author of ‘The Banking Panics of the Great Depression

“..(they) were either operated by real estate promoters or exhibited excess enthusiasm to finance a local real estate boom”

It brought with it a period of high inflation, and coupled with speculation in real estate securities, produced an explosion in the value of construction that would not be equalled until the boom and bust era of the late 1980s.

NY construction(Tom Nicholas and Anna Scherbina – Real Estate Prices During the Roaring Twenties and the Great Depression)

By 1925 real estate bond issues accounted for almost one quarter of all the corporate debt supplied – and between 1925 and 1929 alone, a quarter of New York’s financial district was rebuilt and 17,000,000 square feet of new office-space added.

This, prompted the owners of the grand Waldorf-Astoria Hotel at 34th Street and Fifth Avenue to sell.

Arising from a family feud between two competing cousins, the iconic guesthouse had been built at the top of a preceding boom and bust land cycle in the early 1890’s, and as ‘the most luxurious hotel in the world’ stood 17 stories high towering above the surrounding residences.

W&A hotel

By the late 1920s however, the décor had become dated and the social elite had centred themselves much further north.

The owner’s decision to upgrade into the Park Avenue district, and build what was then, ‘the tallest hotel in the world’ allowed John J. Raskob to acquire the site for The Empire State Building for the not so small sum of $16 million.

Raskob needed a further $50 million for construction, which he achieved by way of a $27.5 million dollar mortgage, as well as engaging with a limited number of substantial backers.

“If the amounts seem considerable the backers knew that this was a money maker. The building would be the greatest showcase in the city filled with them.  And tenants would line up to print “Empire State Building” on their letterhead….” wrote Robert A. Slayton author of Empire Statesman: The Rise and Redemption of Al Smith

The location was later criticised for being too far from public transport, but no such concerns were raised at the time.

New York office leases began on May 1st – the sooner the building was completed, the sooner it would bring in an income and notwithstanding, Raskob’s two main competitors also in the race for height supremacy – auto industry giant Walter Chrysler and investment banker George Ohrstrom – had already commenced.

Chrysler had seized his opportunity when gratuitous plans for an opulent office block designed by architect William Van Alen had fallen through due to financing.

He took over the project with clear intentions.

Adjusting the tower’s ascetics to reflect the company’s triumphs, with gargoyles, eagles and corner ornaments made to look like the brand’s 1929 radiator caps. Chrysler instructed the builders to make sure his toilet was ‘the highest in Manhattan’ so he could look down and as one observer put it, “shit on Henry Ford and the rest of the world.”

garg

Around the same time, George Ohrstrom, also determined to set the record, purchased the site that was to become the headquarters of The Bank of Manhattan at 40 Wall St (now the Trump Tower.)

Ohrstrom’s architect was H. Craig Severance, former partner and competitor to Walter Chrysler’s designer, Van Alen – and the bitter rivalry between the two added considerably to the dynamic.

Construction for 40 Wall St start started in May 1929 and no less than one month later, in April of the same year, fearing the competition Chrysler reportedly called his architect in frustration exclaiming:

“Van, you’ve just got to get up and do something. It looks as if we’re not going to be the highest after all. Think up something! Your valves need grinding. There’s a knock in you somewhere. Speed up your carburettor. Go to it!”  Higher: A Historic Race to the Sky and the Making of a City Neal Bascomb

Van Alen subsequently increased the height of the Chrysler tower to 925-feet and added more stories – 72 in total.

Not to be outdone however, Severance added 4 extra floors to his own design, extending the building’s height to 927-feet – only marginally taller than Van Alen’s efforts, but by this stage the steel frame for the Chrysler building had already been completed and in Ohrstrom’s mind, he had already won.

The Bank of Manhattan was finished at record speed, taking just 93 days in total – meeting the May 1st deadline and setting the record for skyscraper construction.

40 wall st

It opened with great celebration – with Ohrstrom boastfully laying claim to the title of “the world’s tallest,” while in blissful ignorance of the final trick Chrysler had yet to pull from his sleeve.

Replacing the original plans of a dome shaped roof, Van Alen enhanced the design with the addition of a 186 foot iconic spire, which was hoisted to the top of the structure in secret and assembled in a mere 90 minutes.

chrysler

This raised the building’s height to 1,046 feet, a total of 77 floors – allowing Chrysler, less than one month later to trump Ohrstrom’s record.

The battle continued long after both blocks were completed, with the consulting architects of 40 Wall Street, Shreve & Lamb, writing a newspaper article claiming that their building contained the highest useable floor and was therefore more deserving of the title.

The Empire State Building however, was to settle the matter.

Hamilton Weber the original rental manager, takes up the story.

“We thought we would be the tallest at 80 stories. Then the Chrysler went higher, so we lifted the Empire State to 85 stories, but only four feet taller than the Chrysler. Raskob was worried that Walter Chrysler would pull a trick – like hiding a rod in the spire and then sticking it up at the last minute” The Empire State Building Book by Jonathan Goldman

The solution to Raskob’s worries was to add what he quaintly termed “a hat!” – marketed as a mooring mast for dirigibles – although never utilised due to the strong winds and updrafts that circulated at the top.

This raised the building’s height to 1,250 feet, easily outstripping both Chrysler’s and Ohrstrom’s efforts, allowing Raskob to scoop the title.

Taking just 13 months to complete, 58 tons of steel, 60 miles of water pipe, 17 million feet of telephone cable and appliances to burn enough electricity to power the New York city of Albany. The Empire State building with 2.1 million square feet of rentable space opened on May 1st 1931 empty – just as the country was entering one of the worst economic depressions in recorded history.

ESB

Dubbed ‘The Empty State Building’ – it did not turn over a profit until 1950 putting Raskob who, in 1929 had penned the famous article ‘Everybody Ought to be Rich‘ by investing in “America’s booming corporate economy,” deep in the red.

The history of this era is a fascinating study.  However as entertaining as the story is, it does not stand in isolation.

From long before the Empire State Building was completed, to the most recent example – the Burj Khalifa in Dubai – mankind’s quest to reach the heavens and demonstrate power through the imposing dominance of boasting ‘the world’s tallest’ structure has – with no notable exception – commenced at the peak of each real estate cycle and opened its doors during the bust.

The pattern is easy to follow:

Improvements in the economy are first reflected in rents, which adjust quicker to market conditions than associated expenses – insurance and utility rates for example – which are subject to contract and therefore typically rise out of step.

This in turn attracts speculative investment, pushing prices upwards beyond the cost of replacement, fuelling a cyclical rise in construction – usually for the purpose of speculation, rather than genuine homebuyer demand.

The steeper land values become, the higher the building must be in order to achieve a profitable return, this in turn increases demand to concentrate both labour and capital around what is usually a centralised core.

There is however a lag in the time it takes for high-density construction to reach the market – usually a number of years – before the extra supply can drive down both rents and values, resulting in the building boom outlasting the boom in prices, and an overhang of vacancies when the fervour dissipates.

Notwithstanding, there are limits to how high you can extend before the whole project becomes unprofitable.

William Mitchell, dean of the School of Architecture and Planning at the Massachusetts Institute of Technology, makes the following point in his 2005 publication ‘Placing Words Symbols, Space, and the City.’

… floor and wind loads, people, water and supplies must be transferred to and from the ground, so the higher you go, the more of the floor area must be occupied by structural supports, elevators and service ducts.  At some point it becomes uneconomical to add additional floors, the diminishing increment of useable floor area, does not justify the additional cost.”

In a subsequent publication he goes one-step further.

“I suspect you would find that going for the title of ‘tallest’ is a pretty good indicator of CEO and corporate hubris. I would look not only at ‘tallest in the world,’ but also more locally—tallest in the nation, the state, or the city. And I’d also watch out for conspicuously tall buildings in locations where the densities and land values do not justify it”  ‘Practical Speculation’ By Victor Niederhoffer and Laurel, Kenner

Mitchell’s warning to look for the “tallest” is not to be taken lightly.

The New York Tribune Building for example, one of the world’s first skyscrapers boasting to be “the highest building on Manhattan Island” – opened in 1874 and coincided with the 1873 financial crisis in both Europe and North America.

The Manhattan Building in Chicago Illinois and the Pulitzer Building in New York, boasting the title of “the world’s tallest” – opened between 1890 and 1891 and coincided with one of the worst economic depressions of that time (particularly in Australia.)

The Singer Building and The Metropolitan Life Insurance Company Tower in New York, boasting the title of “the world’s tallest”  – opened in 1908 and 1909 respectively and coincided with stock market panic of 1907 (the Knickerbocker Crisis.)

The World Trade Centre in New York, boasting the title of “the tallest twin towers in the world” – opened in 1973 and coincided with the 1973-75 economic recession.

The Sears (or Willis) Tower, boasting the title of ’the world’s tallest” opened in May 1973, coinciding once again, with the 1973-75 recession.

The Petronas Towers in Malay – surpassing The World Trade Centre as “the tallest twin towers in the world” – opened its doors to tenants in 1997, coinciding with the Asian financial crisis.

The Taipai 101 in China, the first to exceed half a kilometre, boasting the title of “the world’s tallest” – opened in the early 2000s, coinciding with the ‘Dot.com’ bubble and burst.

And most recently, the Borj Khlifa in Dubai, the current ‘tallest in the world’ -, opened in 2009, coinciding the sub-prime crisis, estimated to be the worst economic disasters to date.

Screen Shot 2014-09-11 at 3.41.05 PM

There are numerous examples, and rarely do these structures go up alone.

As we are seeing currently both here and abroad, the rate of high-rise construction globally, stands at unprecedented levels – funded by low interest rates and a wash of easy credit.

Matthew Guy, Minister for Planning in Victoria, has been a staunch supporter of higher density dwellings, but the risks surrounding a boom on the scale we are witnessing presently, cannot be diminished.

The small one and two bedroom apartments, funded in main by offshore speculation, are poorly designed, lack natural light, do not offer value for money, and lay out the reach of most first home buyers who face tighter lending restrictions for dwellings of this type

Notwithstanding, Prosper Australia’s Speculative Vacancies report for Melbourne in 2013, revealed many of these properties sit empty – up to 22% in the Southbank and docklands area – a figure that could well be higher today, considering the rate of what can only be termed, ‘bubble’ construction.

And to make matters worst, there is growing evidence the approved sites for skyscraper construction are being ‘flipped’ prior to commencement, with new owners reapplying to have height limits extended still further.

Screen Shot 2014-09-11 at 1.14.27 PM

(Developers ‘flipping’ projects for huge profits – The AGE September 1, 2014)

The next ‘world’s tallest’ will be the proposed Azerbaijan Tower in Baku, due for completion in 2019 – and projected to be 1km high.

AT

It coincides nicely with the completion of ‘the tallest’ residential tower in the Southern Hemisphere – Australia 108 in Melbourne – which at 319 metres, will exceed the height of the current record holder – the Eureka Tower – and unless we see changes to current policy – will mark another period of financial instability.

Aus108

Only by removing the accelerants that produce this behaviour – contained in our tax, supply, regulatory and monetary policies – can we start to address the boom and bust cycles that lay us open to economic instability, fuelling the boastful passions of financiers at the expense of the rest of the population.

It is these policies that keep us locked around a centralised core, increasing the cost of land at the margin and resulting in decades of dead weight taxes on every worker in the country being clawed back by way of preferential tax treatment for those that speculate on the rising value of land.

Every citizen in Australia would be richer by a significant margin if we collected instead, the economic rent from land, resources, banking profits, government granted licences and so forth, and used these to fund society’s needs rather than progressively taxing productivity to feed an elevated level of rent seeking behaviour.

But until such a time there is only one moral to this story.

Pride comes before a fall.

Five years on since the US recession ‘officially’ ended in June 2009….

By – Catherine Cashmore

Five years on since the US recession ‘officially’ ended in June 2009, urban land prices are rising, the pattern of history is repeating, and this time, the players on the chessboard have changed.

But our Governments are turning a blind eye.

They have yet to acknowledge why the crisis happened, or put policies in place to prevent it happening again.

Expensive welfare systems, elaborate tax and transfer policies, and the financial ‘cures’ following the previous land induced crash in the early 1990s, did nothing to prevent the swiftest and sharpest synchronised global downturn in human history.

Taxpayers were punished, bankers got a “get out of jail free” card, and the largest real estate investment trusts spent $50 billion purchasing 386,000 foreclosed homes, to rent out to previous owners who believed and acted on the lie; “there is no bubble.”

The IMF, and policy makers are now twisting themselves in economic knots trying to pin down a ‘cure’ for the dangers of excessive house price inflation, they readily admit lead to most banking crises, with Australia featuring in the top five of each of their highlighted risk assessments.

“……our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014

The IMF claims the ‘neglect of house price booms is over’ but as the OECD ‘Post Mortem’ of the 2008 crises reveals, these economists can’t see

They ignore the role that rent (unearned income,) debt and the financial sector play in shaping the economy.

They have a colourful history of recurrent boom bust land cycles, all replete with rampant speculation and easy credit, spanning in excess of 300 years from which to study … and yet;

“The macroeconomic models available at the time of the crisis typically ignored the banking system…” (OECD Forecasts During And After The Financial Crisis: A Post Mortem – February 2014)

In other words, based on the aesthetic qualities of their equations, the 2006/7 bubble couldn’t exist. A story we hear repeated every year as prices continue to defy gravity and economist try and explain it away with ‘sound fundamentals.’

Neo-liberal policy made matters worst.

Less government interference protecting labour or redistributing wealth through taxing the rich, deregulation of capital markets, lowering trade barriers, reducing state influence though privatisation and fiscal austerity – was termed by American scholar Robert Waterman McChesney “Capitalism with the gloves off.”

It promised to lead to efficient markets and lower unemployment

But at the onset of the GFC, unemployment in developed nations rose above any previous recession of the past three decades, whilst wages, as a share of GDP plummeted to their lowest point since the Second World War.

GDP+Wages

“This should be a wake-up call…” concluded the UN in their annual Trade and Development report that revealed the findings;

“There must be something fundamentally wrong with an economic theory, that justifies the rise of inequality mainly in terms of the need to tackle persistent unemployment.” Annual report by the UN Conference on Trade and Development 2012, Ch 11. Section C (analysing the effects of “labour market flexibility.”)

In the UK, Bank of England has imposed a 4.5 times loan to income cap on 85% of mortgages, along with various ‘stress tests’ to please the regulators.

But the Council of Mortgage lenders show only 19% of recent London mortgages are at or above this ratio, whilst the national figure is a mere 9%.

By volume, London accounts for around a quarter of loans nationally, (Q1) so the 85% cap will do little to nothing, except perhaps eliminate home ownership for low-income groups.

But stemming inflation or deterring speculative activity is not, and never will be, Central Bank policy;

Carney – “These actions should not restrain current market housing activity … these actions will have minimal impact in the future if the housing market evolves in line with the Bank’s central view,” (i.e. up) Guardian – “Bank of England will not act on house prices yet” 27 June 2014

In the U.S.A just five megabanks and their holding companies control a derivatives market worth hundreds of trillions of dollars, in Australia the ‘Big Four’ command 80% of the market and 88% of residential mortgages.

‘These are the men who have the most economic power in the world’ wrote British philosopher, mathematician and historian, Bertrand Russell, one of the 20th century’s leading logicians; “..and they derive it from land, minerals, and credit, in combination.”

Russell understood only too well, that all productive gains, every improvement in society and the economy, would be capitalised into rising land values, enriching those who owned the assets but more so, those who created the credit and traded on the debt.

Milton Friedman meanwhile tutored that societies are structured on greed.

But greed means taking something from another, grasping for a larger slice of the pie. (see; pareto efficiency.)

Greed is not a natural feature of a well functioning community; rather it’s a feature of a dysfunctional economy that allows a country’s wealth to gravitate into an elite nucleus of financially strong hands.

It remains that the economy is fuelled by what is termed the FIRE sector – Finance, Insurance, and Real Estate.

The FIRE Economy is dependent on rising asset prices – on you and me buying houses – so it can extract economic rent.

The three sectors work together – they’re intrinsically linked.

The banking sector pumps a colossal amount of credit into the system by way of a home loan. Real estate businesses sell the products – some trading as REITs – insurance companies underwrite the owners debt, property, and income, and as the interest payments compound – doubling and doubling again – the debt is recycled into more lending, more borrowing, higher house prices – making those who trade on the debt in an obscure concentrated market of derivatives, increasingly wealthy.

Bubble FIRE

Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

The Government, many members of which come directly from the industry itself, receive substantial payments from the FIRE sector.

For example, between 1998 and 2008 the banking industry spent $3.4 billion lobbying the US government.

In Australia, the ICAC investigations into Illegal donations from developers and “wealthy property tycoons” reveal tens of thousands of dollars have been used to influence decisions by local, state and federal governments.

It should therefore be of no surprise that ‘affordable housing policy’ always seems to work in reverse.

Generous subsidies are handed over to investors – all of which are capitalised into land prices.

Restraints on supply are imposed, ‘rich neighbourhoods’ are protected from over development, land on the fringes is no longer dirt cheap, acreages are banked, exempt from State Land Tax until subdivision at the owner’s pleasure.

To survive, the FIRE sector must effectively sell the illusion that the economy can grow on rooftops, that we can all take part in an orgy of economic rent.

“Only the little people pay taxes” (i.e. work for a living) – we can all become wealthy through property investment, dining out and trading on leveraged gains, perhaps donating a little to charity, or taking part in some publicity-generating event to raise funds for homelessness along the way – as our politicians are fond of doing.

Of course, first homebuyers suffering alarm at rapidly escalating costs are necessary oxygen for the system.

So their judgement is manipulated as housing affordability is now reclassified as mortgage serviceability – how far the paycheque can stretch each month rather than highlighting the upfront cost, while young buyers are encouraged to enter the market as speculators, living off their parents, until they gain a ‘foothold’ from leveraging the equity.

Banks assist with an array of financial products – offset accounts, honeymoon rates, shared equity schemes – mortgages treated like credit card payments, where all that’s required is the interest and should the market collapse with money still outstanding, they’ll collect the house too.

The result is land is now used for greed rather than need, pushing city boundaries outwards, requiring an excessive use of durable capital, which eventually leads to a shortage of loanable funds.

You will never be told the system can fail.

Instead you will hear that house prices can maintain a ‘high plateau’ – stagnate for a while until we all ‘catch up.’

However, the increase in the annual rate of growth is now part of the income that buyers pay for and lenders rely upon.

This is how real estate is sold – investors gravitate to areas that advertise ‘good capital gains,’ calculating the land’s value based on both the rent a tenant will pay plus the projected annual increase (land rent.)

Buyers live in fear of land values collapsing, yet, while prices trend higher, expectations over shoot the mark by no small degree. Landowners treat their unearned increment as income, raising consumption, lowering saving, putting to upward pressure on inflation, which eventually results in interest rates rising.

Never, throughout the course of history, has such a process been economically sustainable.

At some point the productive capacity of the economy can no longer support the boom – and as Australia’s history of land induced financial crises reveal, the end is not always as kind as experienced in 2008. Bubble Economics: Australian Land Speculation 1830 – 2013, by Paul D. Egan and Philip Soos

“House prices don’t always go up” warned the Governor of the RBA, Glenn Stevens at a recent speech in Hobart, just as he did in March, – a message he has repeatedly reiterated since appearing on Seven Network’s Sunrise in 2010.

But Australian investors aren’t listening to Glenn – they’re reading the media headlines, covering the latest findings in the BRW Rich 200, which shows property to be the ‘single biggest source of wealth,’ and entrepreneurs “piling into property faster than ever.”

Banks remain disturbingly under-capitalised.

“I’ve had land that has doubled in value in the past 12 months,” said Harry Triguboff ……… (BRW Rich 200: Fatter profits for property barons – 27th June 2014)

But while Triguboff paid a lot for his land, but he did not make his cheque payable to the local school, park, rail network, or the array of public and community services that yield his land a healthy source of locational revenue that grants such windfall gains.

His payment went direct to the previous owner of the land, who pocketed the profit, while the funding needed for maintaining the facilities and attracting workers to the city, come from an elaborate network of taxes, which fall primarily on income and productivity – ‘the little people.’

HTR

This is the kind of rent seeking most of us have some experience of, a process that effectively punishes and disheartens the priced out sectors of the community, whilst encouraging the hoarding of land as the road that leads to riches – thereby ignoring the social and ethical problems that result from the process.

The effect is to turn us into a nation of speculators where moral judgement is subverted by the unearned yields one can receive.

Investigate most societal problems, wages, housing, health, poverty, the loss of jobs to off shore markets, and this will be found at the root.

No one is born into poverty or inequality – these things are not by-products of nature – in a modern society the extremes we experience that lead to protests and riots over cuts in expenditure to welfare (a requirement exacerbated by the process outlined above) are due to policy and political ignorance.

When the Henry tax Review in 2008, concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”

It was onto something important.

Lifting taxes off labour and restructuring our tax and supply policies is a good start, but alone it won’t do. Removing the power embedded in the banking industry to create credit based on their own vested interests is equally important, it would free up the creative capacity of the community and move instead toward a society and culture that is able to provide for all.

However it remains, that every effort in history to effect the changes suggested above have been fought by the establishment. In this respect, change can never come from the top down. It requires a system that can return democracy to the people through a slow process of re-education, and it’s a system we need to advocate if social and economic justice is the goal.

But until such a time, it’s business as usual, the cycle will play out the same and we have a way to go yet – but be well aware, the date for the next global financial crisis has been set.

 

 

(For information on specific timing for the current cycle please contact me direct.)

“By hoarding housing, the rich pay less, while the poor pay more”

By: Catherine Cashmore

(Short article written for Property Observer – covering items made in detail else where on this blog.)

I was contacted twice last week to comment on news stories that featured young Australians building their way to retirement, through debt, leverage and speculation, on the back of rising property prices.

Described as ‘an entrepreneur,’ another a ‘wonder kid,’ both stories told a similar tale.

A gift from mum and dad had helped with the deposit – living in the family home had enabled investment into areas that may not have suited their ‘home’ buying requirements.

Rising property prices had enabled equity to leverage into the second acquisition – it was not reinventing the wheel, rather a repeat of an all too familiar theme.

One had managed to reach his sixth investment by the age of 26 (having started at only 19) – both were on their way to becoming property investment advisors – wanting to help others achieve real estate riches too.

“Young buyers are entering the property market as investors” prompted one reporter – which is no more obvious than saying “circles are round”.

Everyone who enters the property market is an investor, I responded.

There would be few in the industry working on the buying side of the equation who had not been involved in what I often term ‘the capital gain game’ – where every option suggested is followed by the question “but which will get the best growth?”

Australia has a lopsided neoliberal economy founded on the back of a 5.1 trillion dollar housing market, over 4.1 trillion dollars of which is irreplaceable land.

We’re slaves to a system where the retirement wealth egg is the family home – our personal economic leverage for all lifestyle and business needs – something that is only achievable if policies are manufactured to ensure values remain high (and climbing), whilst debt levels remain ever affordable.

click image to open in a new window

Source: Philip Soos

It used to be called ‘Monopoly’. Today its termed: ‘getting onto the property ladder’.

Retire as a renter or find a way to ‘work the system,’ playing a dangerous game of debt and leverage, and hoping when the wind finally blows, you’re not left holding the house of cards.

For those unable to afford current high prices, they will see no tax benefit – unless their income is low enough to require welfare assistance.

Rather they will be at the mercy of rising rents with an uncanny tendency to outpace inflation, tight vacancy rates and few low budget options.

If, as above, they are the ‘lucky’ beneficiaries of family assistance to enable their step onto the first rung of the ladder, they’ll enter a tax system skewed toward ownership, the benefits of which are capitalised into the price, pushing values higher.

Source: Bubble Economics by Paul D. Egan and Philip Soos

Under such a system, the final consequences are set in stone.

On a global scale, the land bubble induced financial crisis of 2008 left millions suffering fatal burns.

Tough austerity measures that followed destroyed the hopes and dreams of thousands of Europe’s youth.

For those just entering retirement, savings were wiped away, along with any chance of employment in later years.

Australia escaped relatively unscathed, but this isn’t because we’ve solved the boom/bust cycle.

Our policies differ little from the affected countries that promote ownership with similar inflationary measures.

First time buyers have no memory of a recession and understandably want their share of the pie.

However our history is littered with recurrent patterns of boom-bust credit and asset bubbles, commonly triggered by high land prices.

They all heralded financial instability and dreadful social consequences – a study of which should perhaps feature higher on the school curriculum.

We’ve just entered into another cycle and already prices have exceeded previous peaks.

Housing cycles are long-term affairs, however unless we begin to studiously take measures to change our tax and supply policies, when the clock ticks round again – as it inevitably will – our house of cards will blow over like the rest.

Many applauded Malcolm Turnbull as he made the most of his share of publicity during the CEO sleep out last week, to raise money for the homeless.

However, Turnbull is part and parcel of a budget and government that exacerbates housing affordability, and by consequence, the very problems he endured a cold night to help ‘solve’.

This is because the government has structured the tax burden to fall predominantly on wages and productivity – which advantages those at the top, who see their landholdings increase way in excess of any taxation or earned income through no individual effort of their own, rather the collective efforts of community investment (items of which I’ve detailed previously) – whilst the productive earners at the bottom of the pile, struggle to make ends meet.

In other words, by hoarding housing, the rich pay less – the poor pay more.

Unless we restructure our tax and supply policies to address this and reduce land prices, encouraging instead, individual investment into productivity rather than speculation on rising land values. Welfare measures to help the homeless are merely a Band-Aid to capture the increasing number falling foul of the system and never a cure.

Which brings me back to the one question both reporters failed to asked,

“Who are rising property prices good for?”

Economic Nonsense – ICAC investigations – And The Inevitable Consequence For A Future Generation Of Renters And Homebuyers.

Economic Nonsense – ICAC investigations – And The Inevitable Consequence For A Future Generation Of Renters And Homebuyers. 

As we approach the Federal budget, once again we have to endure another round of economic nonsense, as the Treasurer tries to convince ‘ordinary’ Australian’s that the country is ‘running out of money’ – facing a ‘budget crisis.’

So ingrained is this message, that few question it.

Instead, Talk Radio is flooded with callers; outraged at the ‘debt burden’ they imagine will be passed onto their children. A lifetime of work and servitude lay ahead – not only charged with the responsibility of paying down their own debt – but the government’s debt as well!

For an administration that wants to retain leadership through blaming the last government for the ‘mess’ they’ve reputedly left us in, it’s a convenient message to sell.

“Fiscal responsibility” is the catch term of the day, cuts to health services, education, welfare, job seekers allowance, wages, and proposed ‘back to work’ assistance for those ‘laid off ‘ from the car industry – you name it, it’s on the table.

Everything that is, except the ‘golden egg’ of speculative windfall gains that can be gleaned from the game of ‘Monopoly’ – or to be more accurate – the increasing value of land

Unlike countries such as Germany, which have historically managed to divert speculation away from residential real estate, with the focus being on productivity instead. Here, we’re all subject to an economy, built on the retirement ‘wealth egg’ of land – our personal economic leverage for all lifestyle and business needs.

It used to be called ‘Monopoly.’ Today its termed – ‘Getting onto the Property Ladder.’

The rules of the game are simple. The player uses as much debt as they can borrow – to ‘buy and hold’ as much as they can – and those who ‘got in’ at the beginning of the lending boom, securing the ‘best’ plots available, win the game.

In relative terms, the ordinary homeowner doesn’t advantage much, but what else can they do? Retire still renting? Or become a contestant and hope their house yields enough ‘appreciation’ to support them when they retire. (But not so much that their children can’t get a foot onto the first ‘rung’ of course, and leave home before the age of 40.)

Our lives are therefore spent working to pay off a mortgage – or two. (That is, unless you’re an unlucky tenant who doesn’t have the funds to buy, in which case you play a game called ‘The Rental Trap.” )

The question we ask however is; ‘At what expense?’ – or perhaps “At whose expense?”

As demonstrated by a recent HIA report – land values continue to skyrocket – with the weighted median across all capitals during the final quarter of December 2013, rising to the;

“Highest level on record… a 22.3% increase on the final quarter of 2012.”

Screen Shot 2014-05-09 at 2.17.44 AM

Or perhaps it can be better illustrated on a graph Wendell Cox (author of the “Annual Demographica Housing Affordability Survey”) constructed which cuts through the usual measures used to convince readers that ‘housing has never been more affordable,” with overwhelming focus on mortgage serviceability rates alone.

Instead, it demonstrates the speculative nature shaping the property cycle, which affects not only established house prices, but building activity as lot sizes reduce, whilst land price per square meter, outpaces income growth considerably.

Screen Shot 2014-05-09 at 2.20.16 AM

As I said in my last column, whilst citing the political motivation behind housing policy; “The smoke screen debates on affordability and scrapping negative gearing, are just that” smoke screens. Something that was subsequently confirmed upon release of the Government’s Commission of Audit, which ruled out any consideration of a change to housing policy – better to tax income instead – easier for the top 10% to avoid it, whilst low to middle income earners suffer the shortfall.

Importantly, the Commission of Audit’s terms of reference was to concentrate on direct government expenditure – such as grants and transfer payments rather than tax expenditure – rebates, exemptions and so forth (such as negative gearing, capital gains.)

We ‘all’ have to shoulder the burden, tighten belts, work harder – pensioners included!

‘All’ that is, except those imposing the ‘rules’ – whose ‘entitlements’ are immune from any ‘fiscal responsibility.’

Yes – the Members of our Federal Government – the ‘issuers’ of our monetary supply, offset through taxing those who do have to ‘earn’ dollars before they can ‘spend’ it – whilst our Government ‘earns’ nothing – but is rather elected, and charged, to manage the budget in the best interests of its working population to promote economic growth – for which education, health, ‘back to work’ initiatives and so forth, are vital pillars.

There is no evidence and no economic wisdom, that indicates running a surplus under current conditions, would be good for the economy, especially if that surplus is to be achieved through the measures suggested. Rather, the Henry Tax review set out a framework of good economic management and this is what we should be moving toward.

Steve Keen in a recent lecture given in Sydney, does an excellent job of demonstrating the inevitable consequence to GDP when Governments attempt to pay down their own debt, whilst ignoring personal debt.

Economic orthodoxy, which stubbornly imposes austerity measures through the impost of onerous taxes on its working population, are foolhardy responses to a budget ‘crisis’ that that should have been learnt following the Great Depression in the 1930s.

There is nothing new about this – indeed, Australia’s oldest PhD at 93 – Dr Elisabeth Kirkby – has just written a 100,000 word thesis on it. And whilst valuable lessons reaped from the grains of history are ignored, the patterns that led to our greatest economic disasters are repeated.

What all demonstrate is, when the government tightens its belt, for no other reason than what appears to be a vein attempt to ‘spruik’ a surplus, it has the unwonted effect of withdrawing money from the economy – leaving the private sector (the working class population) to pick up the slack.

Therefore “repairing the [government] budget” with the claim it’s putting Australia “on the right track” – is not putting the fate of ‘Australian’s’ on the ‘right track.’

It is the Government’s responsibility to manage the monetary system for the needs of its population (whether surplus or deficit) – spending enough money into the economy to keep employment and productivity boosted, which by design, reduces pressure on the welfare state.

Yet it chooses instead to penalise productivity and ignore tax expenditures such as the capital gains exemption on owner occupied housing or scaling back negative gearing.

In this respect, it is economically irresponsible, is to have a growing deficit offset by tax receipts, that reward speculation and by consequence, widen the wealth gap between rich and poor.  Ironically, the very gap the tax and transfer system is supposed to narrow.

In other words, we are not burdening our children with debt – we are burdening them poor economic management

As austerity measures bite and the retirement age increases, the majority of Australian’s will be working longer and harder – and whilst the Government pays down its reputed ‘debt burden’ – private debt levels will continue to increase as families borrow to ‘afford’ the basic necessities they need, most likely leveraged against their own homes.

Notwithstanding, most of our debt (including foreign debt,) is bank created debt – arguably, a far greater concern than Government debt.

For those that need a reminder – as demonstrated in the latest ABS social trends report – total household debt was $1.8 trillion as at the end of 2013 – higher than it has been at any other time over the past 25 years.

Real Household Debt Per Person. ABS

household debt

Low interest rates aside – $1.8 trillion is a hefty figure.

To put it in some kind of context – a trillion, is a thousand billion.

The sun is set to burn out in approximately 5 billion years. A trillion is so large; it’s almost meaningless in real terms.

Total Government debt is around $542 billion (as at March 2014 – RBA) – that’s about 35% of GDP.

In contrast, our household debt to GDP ratio is estimated to be around 97% (as at December 2013 – RBA) – assisted by low interest rates and an array of financial products to ‘woo’ new borrowers into the property market (such as shared equity schemes, interest only loans, redraw facilities, offset accounts and so forth.)

Therefore instead of our current leaders asking Australian’s what they can do to assist Government debt. We should be asking the Government, what it will do to assist private debt? Particularly as we move forward over the next 12 months or so, and the lending cycle turns.

Capitalism?

Of course, this problem is not unique to Australia. Thomas Piketty’s book “Capital in the 21st Century” has just come out to great acclaim, choc full of statistics to demonstrate how income earners – the vast body of productive workers, who prop up the local economy through the taxes they pay and products they produce – are the losers, compared to those who hold stores of unproductive wealth.

The book focuses on the ‘1%ters’– advanced through gifts of inheritance – those who hold the vast majority of ‘assets.’ Controllers of the stock and bond markets – collecting their ‘economic rent’ by way of hording property, and effectively, ‘buying’ protection through lobbying seats of power

It’s an age old game, and in a world where gaining political leadership is only possible with vast sums of ‘advertising’ dollars, lobbying is crystallised into the system.

We’re currently seeing this with the ICAC investigation (link to Renegrade Economist interview well worth a listen,) as it uncovers a web of alleged political corruption, with illegal donations from property developers and other sources, funnelled into a Liberal Party slush fund.

Meanwhile, Clive Palmer has been accused of “spending money like a drunken sailor” to secure a third seat in Senate for his PUP party.

Palmer reportedly entered the leadership battle due to “poor policy decisions” by the Gillard Government – the ‘carbon tax’ in particular being highlighted, which promised to negatively impact his core business.

However, his other policy evaluations leave much to be desired

For example, Palmer’s ‘housing affordability’ plan, is to make home loans tax deductable for the first $10,000 – a move which will unquestionably push land prices higher, as future buyers factor the savings into their budget and adjust price expectations accordingly.

But then, considering Mr Palmer’s significant land holdings, which are said to include;

  • “A six bedroom, 11 bathroom, 22 car garage property in Queensland – along with;
  • An array of golf courses. As well as;
  • “Family and associates” owning a total of “11 homes in the Sovereign Islands” on the banks of the Southport Broadwater – as well as;
  • “Other known properties at Broadbeach Waters on the Gold Coast, Fig Tree Pocket in Brisbane, Jandowae on the Darling Downs, Queensland, and Port Douglas” and notwithstanding;
  • “An undisclosed number of properties held in trust for their daughter.”

I suspect lowering land values, may not be top of mind.

The wealth tax ‘solutions’ Piketty proposes to stop the ‘gap’ widening; fail not only by the confused definition of what one would consider ‘wealth.’ (A Rembrandt painting, or luxury Yacht for example?) But also that of ‘capital.’

In modern terminology, capital is used for anything that yields a profit – which under our current system includes land. However, in classical terms, capital is a factor of production – a depreciating asset and one, which can be reproduced.

In a society built on the foundation of ‘free markets,’ factors of production flourish under competition. If one widget costs too much, an entrepreneur will find an innovative way to produce the same widget at a cheaper price

It’s called capitalism.

Land however is not a factor of production. It can’t be moved or reproduced and it’s limited in supply. Therefore the revenue stream generated from the unimproved portion alone is due to its locational advantage, and little else.

The free market activities in a capitalist society, cause land values to increase – and considering this is through no act of individual exertion on the vendor’s side, but rather the collective efforts of the community, it makes sense that most consider owning a well located plot of land, better than both money in the bank and the wages they have to ‘earn.’

This is why increasing charges on the revenue stream ensuing from the locational value of land, and recycling it back into the community – (which is where it came from, and where it belongs) – by way of a tax shift off productivity (wages) and onto our valuable and limited natural resources – was termed the ‘least bad tax’ by the capitalists Milton Friedman and Winston Churchill – to name but a few.

Rising land values harm capitalism, they increase the rent for small business owners, always benefitting the landlord but never benefitting the wage earner. Furthermore, rising land values force young people out of the market, whilst making those ‘in’ the market wealthy – and widening the gap between ‘rich and poor.’

When land prices inflate, jobs are lost as more revenue is taken away from productivity and soaked into the ground.

It’s not called capitalism; it’s called capitalizing -‘taking advantage of’ community created revenue – the total of which is pocketed by the landowner.

This is why land prices are so high – and  ‘vested’ interests of policy makers always act to push them higher.

The great man Buckminster Fuller – architect, systems theorist, author, designer, inventor, and futurist – once said;

“You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” (H/T author of soon to be published book “Land” Martin Adams)

We live in a democracy, therefore any change to the status quo needs to come from the ground up – we will never get it from the top down.

The Henry tax review set out recommendations for transitioning our economy based on the ideas penned above.

How we get there is worthy of debate – however thankfully, due to the internet and a new age of enlightened ‘priced out’ folk, we can start that debate in 2016/17, by using our own preference and economic wisdom to vote a government which acts to widen the rich/poor divide out. By which time there ‘may’ (?) be better options to vote in.

Catherine Cashmore

People Power and Housing – Centre, Left, and Right.

People Power and Housing – Centre, Left, and Right.

The protests that washed across major cities and towns a few days ago, covered a wide variety of issues, yet underlying them all is dissatisfaction with both sides of politics and the frustration in the community that ‘voices’ are going unheard.

We’ve been used to seeing similar demonstrations across the austerity-ridden countries of Europe and the USA, and political clashes such as those in Russia and most recently Ukraine

Yet since the fall out of the last economic crisis, a concentrated outcry of public anger has penetrated democratic society and it’s not limited by ‘cause’ or segregated by age and status, but generated by the incredible impact of social media enabling a wide array of ordinary citizens to vent their concerns outside of sporadic government polls and the headline sensationalism of main stream media.

The natural limitation of Government is the inability to please all, and no one would expect as such.  In a democratic society, they’re elected to enact on the policies campaigned upon – asked to lead rather than follow and ensure citizens achieve a platform that assists in advancing equitable outcomes.

Albeit, it’s a brave Government that turns its head away from large vocal demonstrations, especially in an age where – through the connectedness of social media – they can be arranged at the drop of the hat, bypassing the usual bureaucratic process of writing to a local MP to highlight community disquiets, or publishing a letter in the local paper.

You can argue back and forth about the issues surrounding this latest public protest. Express outrage at the inconvenience incurred to the daily commute. Or even question its relevance considering we have not long elected the Coalition into power.  But when a wide makeup of individuals, from all sides of the political spectrum, takes to the streets – not on one agenda alone – but an array of disgruntlements.  It is no longer merely representative of a minority that sits on the fringes of society; it signifies a clear message of distrust – a potentially destabilising force.

“Cone of Silence”

Tony Abbot’s government made it clear upon election, that they intended to control the flow of information available for public discussion.

It wasn’t only displayed in the media restriction detailing daily boat arrivals, but in a large array of research undertaken by the previous administration, which has now been firmly locked into ‘archive’ status.

This would include two I’ve mentioned in recent columns – the National Housing Supply Council, and the year long study that formed the white paper into the “Asian Century,” which outside of general criticism, remains a useful tool of reference for Australia’s future demographic makeup.

So you could say that listening to the public voice, isn’t the current Government’s priority – but then, neither was it for the last.

Little if anything came from those reports.  The were good on content, but lacking in action – and much like the “2020” summit in 2008, the results can be summed up neatly by words from biographer, Nicholas Stuart, in ‘Rudd’s Way – November 2007 – June 2010;’

“….His rhetoric inspired and enthused voters. And yet …. and yet …. nothing happened.”

“Nothing happened” – because Governments too often bend the knee to those with the ability to influence political leadership and public opinion, rather than acting ‘democratically’ for all.

Housing policy alone aptly demonstrates this.

  • The tax and transfer system values owners over renters;
  • Encourages and rewards those who use the land as a speculative investment for personal gain;
  • Advantages giant corporations over independent businesses;
  • Widens the ‘wealth’ gap between rich and poor;
  • And hampers timely development of affordable housing; (to name only a few.)

When concerns are raised, our leaders spend a few wasted millions on comprehensive enquiries to ask ‘why?’- like some clueless high school student.

“What do we want?..”

These protests, whilst not directly about land prices, were about community and social justice, of which housing forms an indivisible part.

The list includes education – and as I’ve pointed out previously, high land prices directly contribute to what’s assessed to be the most segregated schooling system out of all members of the OECD countries.

Some of the highest land values are found in the best Government funded school catchment bands, and as an auctioneer proclaimed during his pre-amble in the McKinnon High School zone last week;

“There is no ceiling for house prices in this area.!.”  A bullish spruik if ever you heard one – but not far from truth.

Record prices continue to be regularly broken, affluent buyers continue to pay a premium.  Yet the price is effectively ‘free,’ because as the zone’s future vendor’s ‘speculate’ – if they hold onto the family home long enough – they are likely to receive a ‘windfall’ in unearned capital gains.

Social Justice? Hardly.

Unwonted robbery?

The community produces the gains through the tax-funded facilities. Whilst market forces drive prices higher, the unearned profit does not flow back to maintaining or upgrading those services – which is where it arguably belongs.

Instead it is privately capitalised– soaked into what is an irreplaceable, illiquid

and unproductive asset, thereby giving free leave for mounting property prices to continue, which, under the current system, grants a ‘tax free’ unearned reward to the owner occupier upon sale

The sell off of public services was also highlighted.  This too can also be associated with high land values, which have dictated what is assessed to be the more profitable offloading of the Millers Point public housing estate, rather than retaining its use for long standing residents, which, by definition, drives social polarization and housing inequality.

It seems in the land of a ‘fair go,’ only the affluent are allowed to advantage from a Sydney Harbor view.

Are They Listening?

Yet the indicators Government use to measure their performance whilst in power are meaningless to protesters, and in many respects, a 21st century economy.

They are no measure of happiness, or signal the worrying rise of mental illnesses such as depression.

Only by ‘hearing’ community voices, gives a clue to that.

GDP – the total value of all products and services bought and sold, a basic measure of money changing hands, does not distinguish between;

  • Productive or destructive activities,
  • Show who’s getting the lion’s share of wage increases, Or
  • Assess where those increases are being invested; (Which, considering housing (land) is currently estimated to be 300% of Australia’s GDP, gives some indication.)

Equally it gives no clue to the foundations of societal health – such as environmental concerns, access to education, or wealth inequality.

Yet these are the issues community wants to address – because these are the barometers that directly impact our quality of living.

Whilst GDP is an excellent measure of the amount of arguably unneeded ‘stuff’ changing hands, it’s also not up to the task of adequately measuring intellectual property, innovation and invention for example – such as the creation of a free app.

It may be concerned with the health of the economy, but as for the well-being of our 21st century community – it’s simply not up to the task.

Equally, unemployment figures are based on theoretical estimates, formulated by way of an extensive ABS survey, which aims to correlate the percentage of the labor force not actively employed, underemployed, or ‘participating.’

They are rolled out monthly, with the widely held ‘text book’ assumption (known as NAIRU) that, regardless of how many actually want to work, should Government pro actively attempt to lower the rate of unemployment below the desired level of “full employment”  – which in Australia, is assessed to be and ‘unemployment rate’ of roughly 5% – it would unwontedly induce inflation and destroy price stability.

A purported ‘fact’ that offers no comfort to those living on the poverty line of job seekers allowance.

This is also largely due to our flawed system of taxation – which places a levy on productivity, (such as income and payroll taxes,) unwontedly impeding the supply of goods and services, which in turn raises prices, feeding inflation and increasing the unemployment rate arguably ‘required’ to lower wages sufficiently to stabilize inflation

If we instead moved toward a system – and one, which was, at least in part, advocated by the Henry Tax review, and not withstanding, numerous other submissions from community advocates such as Prosper Australia, or the Land Values Research Group to various senate enquiries over the years. And taxed the unearned gains from land (as mentioned above,) rather than the earned gains from productivity.

It would (as has been proven historically) influence;

  • A reduction of social polarization – and therefore inequality.
  • Remove the needed ‘sell off’ of public services due to high land values.
  • Boost productive investment, assisting the job market and advancing competitiveness for small business.
  • Reduce the speculative element that drives land prices ever higher.
  • Provide a steady base of revenue to invest in public services as well as affordable housing, and;
  • Ensure infrastructure is built for need – full utilization of land encouraged – and land banking reduced.

Productivity Paradox

In light of all the above – it is remarkable that back in the 60’s and 70’s, discussion in the university lecture halls was centred on the ‘productivity paradox’ – correctly assuming it only a matter of time before all mankind’s basic needs could be largely fulfilled by robots (which they has been.)

Economists were deliberating what we’d do with all our leisure time when a full working week was no longer necessary!

A stark change from the current mode of discussion, which is consumed with how long past the age of 65, individuals will need to work in order to retire mortgage free, with enough left in the pot to afford the basic necessities of life, which in most cases, is inadequately funded by super annulation alone.

If it were possible to send the dog to work, we’d have already done so.

Community

Indeed our economy is not founded on the pillars of community and social justice, of which the protests are so concerned.

As admirable as numerous recommendations made to various senate enquiries into issues of inequality, affordability, finance, and environmental concerns have been, nothing has changed, because we have a lopsided economy, built on a $5.02 Trillion housing market ($4.1 Trillion of which is land) – and on this, and many other matters alone, a new generation of enlightened folk have clearly had enough.

High land values have played an important part in all the issues of social inequality highlighted above, of which I’ve provided ample evidence in previous columns.

Our major cities now exhibit what’s considered to be a very ‘non Australian’ style ‘English’ cultural class divide – as polarization between the asset rich and income poor expands.

The roll on effect impacts the environment, employment, education, and mental illness – as residents are forced into areas lacking in essential amenities – once again due to a flawed system of finance and housing policy.

To Conclude..

And so, when you start to see what is so beautifully highlighted using the maps below, which show where the affordable property was located in 2001 for low and middle income buyers, compared to 2011 in our major capitals, which hold the lion’s share of population.

(The yellow patches being affordable, and blue patches unaffordable.)

Sydney SP Brisbane SP Melbourne SP

And you read quotes from a long standing resident advocates, at the soon to be forced out Millers Point public housing facility, who rightly question;

“The government says their core business is not housing. But surely their core business must be communities….?!”

Then you start to get a grip on the central issues this protests represents;

March in March

And I would suggest – (as expressed on their website) – it really is “only the beginning.”

Catherine Cashmore

By Catherine Cashmore, a market analyst, journalist, and policy thinker, with extensive industry experience in all aspects relating to property. Follow Catherine on Twitter or via her Blog.